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Ophir Energy - High-Impact Schedule Upcoming

Ophir Energy (LSE:OPHR) is starting to look interesting again. The company, which is a major offshore oil and gas exploration company in Africa, is a different proposition in that it generates no revenues and the potential is in the discovery of resources and monetising them. Since listing a few years back at a list price of 250p and a market cap of £799m, the company has grown significantly to a current market cap of £1824m and a share price of 308.9p. The discrepancy is due to a large placing and rights issue that Ophir undertook earlier in the year, in order to fund their upcoming drill program. Ophir's share price has slipped over the recent months due to a combination of factors including a slippage in their work program and the sale of shares by Lakshmi Mittal and US hedge fund Och Ziff dampening sentiment. A lack of catalysts in their drill program also contributed to this as after all, Ophir's value is directly linked to their exploration results. However, with some big targets lined up, and the underlying value of their assets remaining, at 308.9p, Ophir may well have established the bottom of its trading range.

﻿﻿﻿﻿﻿﻿From a chart perspective, Ophir is well poised to move strongly over the next couple of months. That move depends very much upon the 300p level so any investor must be wary. A breach of 300p would see 250p as the following target, whereas if the share price remains above it, the target is as high as 375p in the medium-term. However, I do see 250p as being the worst case scenario, and in any terms at that level I would see Ophir as being a very appetising M&A target, especially if drilling and appraisal success continues. The double-top has clearly taken its toll on the share price and ultimately, there have been no genuine recoveries from that. The drop in July from the results also looks overdone and a false dawn considering the share price was slowly moving to try and break the top trendline.﻿

VSA Capital also have a buy rating with a 710p target for the company

Since August, there has been some minor institutional activity although it won't have helped the share price. Major shareholder Capital Group Companies have been reducing their stake although RS Investment management (who act on behalf of various nominees including BNY Mellon and JP Morgan) have upped their stake slightly. It's also encouraging that various Ophir directors have increased their stakes since the resutls, and by material amounts. The table on the right shows the current set of price targets by the brokers (excl. VSA Capital). Almost all the brokers have, what translates to a 'buy' recommendation although Liberum Capital takes a bearish approach to Ophir with a 255p price target citing 'disappointing changes to the drilling programme'. Nevertheless, the average price target is 489p and that is well above the current share price. Furthermore, a lot of these are after a string of downgrades and it is very much the case that price downgrades follow poor share price performance, rather than the other way around. Therefore, any trend change could well signal a set of broker upgrades.

﻿Ophir is listed on the FTSE 250 Index and is currently a pure-Africa play. Whilst the company has undergone portfolio rationalisation through various disposals and stake reductions, it has maintained only what can be called an extremely prospective set of acreages. Their main acreages however are in Tanzania, Equatorial Guinea and Gabon with working interests in Ghana, Kenya and Somaliland among others.

The Directors estimate the net risked prospective resources of the entire portfolio to be 3,075MMboe (2,725 MMboe following Government back-ins). That is equivalent to 3.075bn barrels of oil equivalent and shows the sheer quality of Ophir's assets. Perhaps Ophir's largest success to date has been Offshore Tanzania in 'Block 1' where their Jodari discovery is being used to anchor a proposed LNG project with satellite discoveries within the block adding to the attractiveness. The entire set of Tanzanian blocks are estimated to possibly contain a massive 60TCF and that play is somewhat derisked by surrounding discoveries and those across the border offshore Mozambique. The entire Tanzanian stretch is filled with International Oil Companies such as Statoil, ENI and BG with companies such as CNPC recently taking stakes in some Mozambique blocks. In Tanzania, Ophir is partnered with London-listed BG Group, so there is absolutely no shortage of farmous names within the hydrocarbon universe in the area. Blocks 1, 3 and 4 are operated by BG whilst Ophir currently operates Block 7.

Without going into the entire portfolio description, Ophir has a 20% stake offshore Ghana (those who have read the reviews on Rialto Energy will be familiar with this) and a series of large stakes in Gabon which have resource estimates exceeding 1 billion barrels of oil. That acreage could emulate that of offshore Brazil where partner Petrobras (yes, another large name) have been highly successful. The best case in Gabon stretches well into the multi-billion barrels of oil. In Equatorial Guinea there is a gross 2.6TCF contingent resource (80% to Ophir) and above that there are a whole set of drills that are aimed at trying to find a further 7TCF. Talks over a LNG plant there will continue, with a floating LNG terminal one of the options that can be considered due to the calm seas. Of course, these figures don't come without risk - Ophir's 2013/14 drill program is indisputably higher risk than those that it has undertaken before, but the possible rewards are far more tempting, with the Mlinzi-1 well offshore Tanzania targeting a mean recoverable resource of 10TCF alone. If that well comes in, it would be a game-changer for Ophir, even though the discovery could not be tied into LNG as easily.

However, there is a caveat. Ophir has been pushed down to the current share price levels partly due to funding concerns. That weighed on the stock from January through March when it became abundantly clear that the cash required for exploratory work would far exceed their cash balance at the time, especially since a company of Ophir's size would need to maintain a $100m cash buffer in the case of any problems. Investors in Ophir hoped this would be done primarily through value-accretive farmouts. However, that was not the case - in fact an equity placing and rights issue was the first port of call. In Q1 a placing was done at 460p, with a separate rights issue that raised £524m net. As at the end of June, that figure was slightly lower so Ophir does maintain a cash buffer at the moment and those funds have secured drilling for at least the next 12 months. When the drill bit starts turning across the continent, that cash will start to be depleted quickly, but even so that aids the valuation at the moment and gives them some manoeuvrability. With H1 expenditure around £140m, that figure will probably be mirrored in H2 meaning that even after 6 months of aggressive exploration action, the company will be well cashed up. I reckon that money could be incoming from farmouts also.

Nonetheless, the lack of farm-out discussion within the half-year called into play doubts over the valuation given to the East African assets, and whether they were hyped up as there was a supposed lack of interest in them. Numerous brokers also stated this view and downgraded accordingly. “The lack of concrete farm-out news is beginning to raise questions about industry interest and/or valuations in comparison with that ascribed by the market,” said analysts at Canaccord Genuity.The problem is that in some projects like Mlinzi, Ophir retains a very high stake which does not help the company's risk profile, and will drain cash quicker. Thus a farmout is preferable. I disagree though that interest is not as strong as first hoped for and that is a view emphasised by CEO Nick Cooper who stated in an analysts call that 'big oil' was involved. In fact, you only have to look at the recent deals across the Ruvuma Basin to see that offshore, interest remains strong, particularly from Asia:

- OGNC bought a 10% stake in Anadarko's Mozambique Area 1 acreage for $2.47bn. Resources estimated at 35TCF to 60TCF
- Recall that Cove Energy was also bought out of Area 1 for $1.8bn at a significant share price premium by PTTEP
- CNPC bought a 20% stake in Mozambique Area 4 for $4.21bn. Resources estimated at 75 TCF within expectations

Another intriguing development was also unveiled this week as a document from financial advisory group Rothschild looks to have been inadvertently uploaded to the Internet which underpins the far-reaching interest that Ophir's Tanzanian acreage is gaining. The document (which was found and brought to my attention by ADVFN posted 'Bunbooster2' seems to suggest that GAIL India, a company that does not normally undertake such commitments, is looking closely at the acreage under their 'Project Zircon' which seeks to establish upstream stakes in the region. Within the document is data which looks at the numbers should GAIL take a 10% stake, that is eventually diluted to 8.8% through the TPDC's back-in rights.

Taking into account sensitivities the valuation for the 8.8% stake is suggested as a base case to be worth between $520m and $600m in the long-run. It also states that Ophir's preference would be for a farm-in partner to take a 20% stake for logistical efficiencies, and that the expected high levels of interest would make a 10% stake less competitive. The details within the document are certainly not final by any means and do little to confirm anything else except that interest in Ophir's Tanzanian assets is strong and that the fears into a lack of interest are probably overbaked. Website PETROWATCH also confirmed some of the documentation as they announced that GAIL India could be looking to bid for up to 30% of part of Ophir's Tanzanian acreage. The exact licences is not clear. The detrimental impact of the equity raise is clear, but Ophir have been smart by sorting the cash in this order as they are now far less likely to be 'backed into a corner' with regards to a farm-out price. The company's management has plenty of experience and know-how in any case. A negative from Ophir's perspective is that they could cede operatorship and that gives them less influence with regard to drilling programmes and timescales - I believe that the sheer scale of Ophir's success in Tanzania should give them material negotiating power.

This interest should not come as a surprise though. Ophir has been linked with possible M&A events on numerous occasions including rumours of US giant Chevron and Shell looking at Ophir as an attractive entry to the region, and for exposure to high-resource plays. I reckon that a takeover of Ophir is actually fairly likely over the next couple of years (as a maximum). The undrilled resource potential is huge and now that the portfolio has been rationalised, it is a much cleaner takeover target. Any farm-downs could actually add to its attraction as any excessive exposures would be reduced. Goldman Sachs recently completed a screening across the oil and gas sector, and in their report, Ophir screened well indicating that it is attractive on a number of metrics.

Further announcements have been made in recent months that only improve the outlook, especially from an M&A viewpoint:﻿﻿- March 2013: "The Jodari-1 DST flowed at a maximum (equipment constrained) rate in excess of 70 mmscf/d and demonstrated exceptionally high deliverability from the Tertiary-aged reservoir." Ophir management estimate that the result of this DST supports potential flow rates of up to 200 mmscfd.
- April 2013: Jodari recoverable resource upped by 700bcf to 4.1TCF
- May 2013: Mzia-1 drill stem test revealed well flowed at maximum limited equipment rate of 57mmscfd. Mean recoverable resources at the well were upped 22% to 4.5TCF
﻿﻿- at end of june, cash and short-term investments totalled £519m. That ignores large trade payables because they have remained high over the years implying no immediate drop should be expected
- July 2013: Chewa-pweza-ngisi resource upped to 4.5tcf mean recoverable
-in tanz, ophir have a 100% strike rate. 9th discovery made was mkizi-1 with expected 0.6tcf
- August 2013: Pweza appraisal well successful in confirming 1.7tcf resource. Pweza-3 appraisal was also successful. 57mmscfd with minimal drawdown implies 150mmscfd unconstrained flow. That's around 25000boepd. Importantly, this will reduce number of development wells required therefore less future capex and more economical and attractive
- September 2013: Drill rig booked for 2014 West Africa drill program

courtesy of freedigitalphotos.net

The upcoming potential for Ophir is nothing short of incredible either. Yes, these higher resource prospects are more risky, but if any number of them come in, then it will have justified the cash cost of drilling them. For example, there is huge potential at Kusini outboard in Tanzania Block 1 as that could underscore the Block 1 prospectivity for LNG on more favourable terms, and become the prime focus of the Tanzanian government. The benefits of economies of scale could also see higher capacity LNG trains used which would result in lower liquefaction and shipping costs per unit of gas meaning higher netbacks and the prospect become more attractive. At the turn of 2013, Deutsche bank noted that a 100% drill success rate across the portfolio would give an unrisked NAV of almost 2500p/share. Chances are that the success rate will be no-where near that due to the lower COS', but even so, the recommencement of drilling should re-ignite the share price. Over 10 wells are due to be drilled that target net unrisked resources of 4.7 billion barrels of oil equivalent of which 69% of that is in Tanzania with 21% in Gabon. Operations at their Tanzanian East Pande and Block 7 are also close to entering the exploration phase and those have high resource potential also. Between 2013 and 2015, there is a total of 75TCF worth of upside. In Gabon it remains the case that Ophir's acreage is right next to that of major IOC's such as Shell and Anadarko. Appetite for a farm-in there should therefore be strong.

Ophir is a different type of oil and gas company. It is risky, and without production, and for a large-cap company, that is abnormal. It is almost a scaled up version of the small/mid-cap oil and gas explorers on AIM. However, whilst it is risky, Ophir is not reliant on any one well, they have a whole portfolio of wells, have a strong cash position, and most importantly, I reckon the current valuation is fairly well supported by what they have already discovered. Therefore what is on offer over the next 12 months is potentially not really factored into the share price. In other words, if Ophir were to drop to 250p (this is my rock-bottom expectation), the company would be valued at £1.476bn, and at that level it leaves itself open to a takeover bid. Even at the current level it looks like a takeover candidate, although I still think it would be post farm-outs.

So what could drive a move higher? Value-realising farm-outs and drilling success are at the top of the list. With the quality of management that Ophir have, and the fact that the quality has been added to in recent months means that at 308.9p, I see more upside for Ophir than downside, over the medium to long-term. Ophir is not a short-term play and it has been out of favour for a while, but that will change at some point, and when it does there is a fair chance of a re-test of 400p. It's worth a shot at this level, but only a small one (due to the risk). I have put a 'Buy' tag on Ophir at 308.9p.

UPDATE 03/02/14 - I have moved Ophir Energy from Buy to No Rating at 315.0p in light of recent market weakness. The shares did initially rise to almost 390p but quickly dropped back due to institutional selling, and actually fell to as low as 275p, which was disappointing. Despite a solid underlying business, the more liquid portfolio stocks such as Ophir are more liable to drop. Combined with failure at their latest Tanzanian drill, which carried significant possible upside, the company is now drilling a very high-risk, potentially high reward prospect in Gabon. For that reason, I have ceased the Buy rating, but will monitor the movements of the company. The percentage return was disappointingly low at less than 2% and in hindsight it would have been sensible to take profits when the shares were close to the 400p target

4 comments:

Received this in my inbox and I have been hoping you would come across ophir for a long time. I like the company due to the high reserves and believe that this will be taken over in the end. it's right next to the majors in a lotof it's blocks and would be a good pricepoint for those in Asia who have been slow. Best Regards, David

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